# India Japan DTAA for Companies with Dividend, Interest and FTS Rates

> Source: https://krystal7.com/insights/india-japan-dtaa-for-companies
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 08 Jan 2026; updated 24 Oct 2026
> Summary: The India Japan DTAA caps Indian tax at 10 percent on dividends, interest, royalties and technical fees paid to a Japanese parent company.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- The India Japan DTAA caps Indian tax at 10 percent of the gross amount on dividends, interest, royalties and fees for technical services paid to a Japanese beneficial owner.
- Article 12(4) covers managerial, technical and consultancy services with no make available test, so most service charges from a Japanese parent bear 10 percent in India.
- Interest earned by JBIC, NEXI, JICA, the Bank of Japan or the Government of Japan, or paid on debt they guarantee, insure or indirectly finance, is exempt in India under Article 11(3).
- Each claim needs a Japanese certificate of residence and Form 41 (old Form 10F) under section 159(8) of the Income Tax Act, 2025. Form 41 is filed once per tax year.
- From 1 Apr 2020 the MLI adds a principal purpose test, a commissionnaire agent rule and a land rich share rule to the 1989 treaty text.

**The India Japan DTAA caps Indian tax at 10 percent of the gross amount paid to a Japanese beneficial owner. The cap covers dividends (Article 10), interest (Article 11), and royalties and fees for technical services (Article 12). These rates come from the protocol signed on 24 Feb 2006. The fee definition includes managerial services and has no make available test. Each claim needs a Japanese certificate of residence and Form 41 under section 159(8) of the Income Tax Act, 2025.**

This page is for Japanese parent companies and the finance teams of their Indian subsidiaries. It covers the rates, the Income Tax Act, 2025 comparison, permanent establishment, capital gains, the MLI, documents and a worked example. Rupee amounts use Indian grouping, so INR 1,00,00,000 is one crore.

## What is the India Japan DTAA?

The India Japan DTAA is the income tax convention signed at New Delhi on 7 Mar 1989. It entered into force on 29 Dec 1989, and India notified it by GSR 101(E) of 1 Mar 1990. It decides which country may tax a Japanese company's income from India. It also caps India's tax on dividends, interest, royalties and technical fees.

Three instruments make up most of the current text:

1. **The 1989 Convention and exchange of notes.** The notes record ten understandings, including two on how India attributes profit to a PE.
2. **The protocol signed at Tokyo on 24 Feb 2006.** It entered into force on 28 Jun 2006 and India notified it by S.O. 1136(E) of 19 Jul 2006. It set a 10 percent cap in Articles 10, 11 and 12 for amounts paid or credited in India from 1 Apr 2007.
3. **The protocol signed at New Delhi on 11 Dec 2015.** It entered into force on 29 Oct 2016 under S.O. 3346(E) of 28 Oct 2016. It rewrote Article 11(3) and (4), replaced Article 26 on exchange of information and added Article 26A on collection of taxes.

The Multilateral Instrument (MLI) then modified the treaty from 1 Apr 2020 on the Indian side. We cover it below.

Article 2 covers Indian income tax "including any surcharge thereon". On the Japanese side it covers income tax and corporation tax.

The treaty page on incometaxindia.gov.in also lists S.O. 753(E) of 16 Aug 2000. Notifications of 8 Oct 2008 and 24 May 2012 amended the list of institutions in Article 11(4) before the 2015 protocol replaced it. The page lists no notification after S.O. 3346(E), when we checked it on 23 Oct 2026.

From 1 Apr 2026, section 159 of the Income Tax Act, 2025 gives effect to the treaty. It replaced section 90 of the Income Tax Act, 1961. Under section 159(4) the Act applies only where it is more beneficial to the taxpayer. Section 159(6) still lets the General Anti Avoidance Rule (GAAR) in Chapter XI override the treaty.

## What withholding rates apply under the India Japan DTAA?

India may tax each of the four main payments to a Japanese beneficial owner at up to 10 percent of the gross amount. The cap does not depend on the size of the holding or the type of lender. Interest earned or financed by the Japanese government bodies listed in Article 11(4) is exempt in India.

| Income from India | Japan treaty article | Treaty cap (%) | Condition | Domestic rate for a foreign company, tax year 2026-27, before surcharge and cess (%) |
|---|---|---|---|---|
| Dividends | 10(2) | 10 | Beneficial owner; any size of holding | 20, section 207(1) |
| Interest from a parent or any other lender | 11(2) | 10 | Beneficial owner | 20 on foreign currency loans; 35 on rupee loans |
| Interest earned by the Government of Japan, the Bank of Japan, JBIC, JICA or NEXI | 11(3)(a), 11(4) | Exempt | Derived and beneficially owned by the listed body | Not applicable |
| Interest on debt guaranteed, insured or indirectly financed by those bodies | 11(3)(b) | Exempt | Japanese resident is the beneficial owner | Not applicable |
| Royalties, including payments for the use of industrial, commercial or scientific equipment | 12(2), 12(3) | 10 | Beneficial owner | 20, section 207(2) |
| Fees for managerial, technical or consultancy services | 12(2), 12(4) | 10 | Beneficial owner; not salary or independent personal services | 20, section 207(2) |
| Gains on shares of an Indian company | 13(3) | No cap | Indian law applies | 12.5 long term; 35 short term (unlisted) |
| Other income arising in India | 22(3) | No cap | India may tax under its own law | Domestic rate |

Sources: India Japan DTAA as amended by S.O. 1136(E) and S.O. 3346(E); sections 197 and 207 of the Income Tax Act, 2025; Finance Act, 2026, First Schedule.

The Indian payer deducts tax under section 393(2), Table serial 17, at the "rates in force". That means the Finance Act rate or the treaty rate, whichever applies. A payer that holds the treaty documents deducts at the lower treaty rate. Our guide to [TDS on payments to non residents](/insights/tds-on-payments-to-non-residents) covers the mechanics.

Each cap has a PE carve out. Articles 10(4), 11(6) and 12(5) remove the cap where the holding, debt or right is effectively connected with a PE in India. The income is then business profit under Article 7. Articles 11(8) and 12(7) limit the cap to an arm's length amount. Any excess paid because of a special relationship keeps the domestic rate.

## How do treaty rates compare with the Income Tax Act, 2025?

The Income Tax Act, 2025 taxes a foreign company's dividends, foreign currency interest, royalties and technical fees at 20 percent under section 207. Surcharge and 4 percent Health and Education Cess come on top. The treaty rate of 10 percent is about half the domestic rate. On rupee interest the gap is wider, because domestic law charges 35 percent.

A foreign company's surcharge is 2 percent where the income paid or likely to be paid exceeds INR 1,00,00,000. It rises to 5 percent above INR 10,00,00,000. Add up all dividends, interest, royalties and fees to the same payee in the tax year before you choose the slab.

| Domestic base rate (%) | Income up to INR 1 crore, cess only (%) | 2% surcharge slab (%) | 5% surcharge slab (%) | India Japan treaty rate (%) |
|---|---|---|---|---|
| 20 (dividends, foreign currency interest, royalties, technical fees) | 20.8 | 21.216 | 21.84 | 10 |
| 35 (interest on a rupee loan) | 36.4 | 37.128 | 38.22 | 10 |
| 12.5 (long term gain on unlisted shares) | 13 | 13.26 | 13.65 | No cap |

We apply the treaty rate flat, without surcharge or cess. Article 2 names Indian income tax "including any surcharge thereon" as a covered tax. Tribunal rulings treat cess the same way, but no CBDT circular settles the point. So Form 146 should state the article and the flat 10 percent rate.

The 5 percent rate in serial 2 of section 393(2) does not help a Japanese lender today. It covers only foreign currency borrowings made from 1 Jul 2012 to 30 Jun 2023.

### How the Japan rate compares with other parent countries

Japan and Germany give the simplest rate tables among India's main treaties, with 10 percent on every capped item. The UK and US treaties charge 15 percent on most interest and royalties. They also use a make available fee test, which leaves many management fees untaxed without a PE. So the Japan treaty is cheaper on interest and royalties and dearer on management fees. Our guide to the [India Germany DTAA](/insights/india-germany-dtaa-for-companies) covers the closest comparable treaty.

An Australian parent has a different set of caps, which our guide to the [India Australia DTAA](/insights/india-australia-dtaa-for-companies) sets out together with the 2022 change.

## What counts as fees for technical services under the India Japan treaty?

Article 12(4) defines fees for technical services as payments "in consideration for the services of a managerial, technical or consultancy nature". This includes the provision of services of technical or other personnel. It excludes payments to the payer's own employees and to individuals for independent personal services under Article 14. There is no make available test.

So almost every service a Japanese parent charges its Indian subsidiary falls inside Article 12. Technical assistance, production engineering, quality audits, regional management and IT support all qualify. India taxes them at 10 percent of the gross fee, with or without a PE argument.

Indian domestic law reads the same way. Section 9(7) of the Income Tax Act, 2025 covers "managerial, technical or consultancy services". The treaty does not narrow the scope. It lowers the rate from 20 percent plus surcharge and cess to a flat 10 percent.

| Service or payment from a Japanese parent | Article 12 result | Indian tax without a PE (%) | What we keep on file |
|---|---|---|---|
| Technical assistance for a licensed production process | Fee for technical services, 12(4) | 10 | Technical assistance agreement; visit reports |
| Production engineering and quality audits run from Japan | Fee for technical services | 10 | Audit reports; time sheets |
| Regional headquarters fee for finance, HR and legal support | Fee for managerial or consultancy services | 10 | Cost pool; allocation key; deliverables |
| Licence of technical know how, drawings or a trade mark | Royalty, 12(3) | 10 | Licence agreement; royalty base |
| Hire of moulds, dies or testing equipment | Royalty for the use of industrial equipment, 12(3) | 10 | Hire agreement; asset list |
| Salary of a Japanese employee seconded to India | Article 15, not Article 12 | Taxed as salary | Secondment letter; payroll records |

Article 12(6) sources a fee in India when the payer is resident in India. It also sources a fee to India when an Indian PE bears it. So a fee for work done wholly in Japan still bears 10 percent when the Indian company pays it.

On software, the Supreme Court ruled in Engineering Analysis Centre of Excellence Private Limited on 2 Mar 2021. It held that end user licences are not royalty under India's treaties. Under the Japan treaty that matters less, because support bundled with a licence is usually a technical fee at 10 percent anyway. We split the contract price between licence and services before choosing the rate.

Seconded staff are different. A Japanese employee's salary falls under Article 15, not Article 12. We see officers treat a salary recharge as a technical fee where the parent keeps control of the secondee. Keep the employment terms and reporting line clear on paper.

## Which interest is exempt under the India Japan treaty?

Article 11(3) makes some interest taxable only in Japan. It covers interest derived and beneficially owned by the Government of Japan, its local bodies, its central bank or a financial institution it wholly owns. It also covers interest a Japanese resident earns on debt those bodies guarantee, insure or indirectly finance.

Article 11(4), as substituted from 29 Oct 2016, names the qualifying Japanese bodies:

1. **The Bank of Japan.**
2. **The Japan Bank for International Cooperation (JBIC).**
3. **The Japan International Cooperation Agency (JICA).**
4. **Nippon Export and Investment Insurance (NEXI).**
5. **Any other institution wholly owned by the Government of Japan** that the two governments agree on.

The Japanese Ministry of Finance said the 2015 protocol added institutions such as NEXI to the list. So a loan from the Japanese parent that NEXI insures can carry interest exempt in India. Keep the policy or guarantee on file and cite Article 11(3)(b) in Form 146.

Interest from any other lender, including the parent, bears 10 percent under Article 11(2). Our guide to an [ECB loan from a foreign parent](/insights/ecb-loan-from-foreign-parent-india) covers the FEMA side of a parent loan.

## When does a Japanese company have a PE in India?

A Japanese company has a permanent establishment (PE) in India if it has a fixed place of business here. A building, construction, installation or assembly project lasting more than six months also counts. So does supervision of such a project for more than six months. Since 1 Apr 2020 the MLI also treats an agent who habitually plays the principal role in concluding contracts as a PE.

| PE trigger | Article | Threshold | Typical risk for a Japanese parent |
|---|---|---|---|
| Fixed place of business through which business is carried on | 5(1), 5(2) | No day count in the text | Parent staff using an Indian office or desk as their own |
| Building site, construction, installation or assembly project | 5(3) | More than six months | Plant construction for the Indian subsidiary |
| Supervisory activities for such a project | 5(4) | More than six months | Japanese engineers supervising a plant installation |
| Services or facilities for mineral oil exploration or extraction, including hire of plant | 5(5) | More than six months | Energy sector contracts |
| Dependent agent | 5(7), with MLI Article 12(1) | Habitually concludes contracts or plays the principal role leading to them; also regular deliveries from a stock or habitually securing orders | Indian sales staff negotiating deals the parent signs |
| Agent acting for closely related enterprises | 5(8), as replaced by MLI Article 12(2) | Acts exclusively or almost exclusively for closely related enterprises | A captive Indian trading or distribution company |
| Preparatory or auxiliary activity | 5(6), as replaced by MLI Article 13(2), with 13(4) | Each exemption must be preparatory or auxiliary; group activities are combined | A liaison or buying office |
| Subsidiary | 5(9) | Control alone is not a PE | Holds while the subsidiary acts for itself |

Sources: India Japan DTAA, Article 5; MLI synthesised text for the India Japan convention.

### No service PE in the Japan treaty

The Japan treaty has no rule that creates a PE from staff days alone. Visiting Japanese engineers create a PE only through a place at their disposal, a long project or supervision, or an agent.

A PE moves connected fees out of Article 12 and into Article 7 under Article 12(5). India then taxes the attributable profit at 35 percent, plus surcharge and cess, through a return. Our guide on [how to avoid permanent establishment risk](/insights/how-to-avoid-permanent-establishment-risk-in-india) covers the controls.

### The commissionnaire rule matters for Japanese trading groups

MLI Article 12 applies to the Japan treaty. An agent in India creates a PE if it habitually plays the principal role leading to contracts the Japanese enterprise routinely concludes without material modification. Japanese manufacturers and trading houses often book Indian sales in Japan while Indian staff negotiate the deals. That model now carries PE risk, and a buy and sell distributor that takes title and risk is safer.

### How India taxes a Japanese PE

Article 7(2) attributes profit to a PE as if it were a separate enterprise. Understanding 6 in the 1989 notes attributes profit to the PE in proportion to its role in a transaction. That holds even if the head office signs the contract. Understanding 8 bars deductions for royalties, fees, commissions, management charges and interest the PE pays its head office, other than reimbursement of actual expenses. The bar on interest does not apply to banks.

## How are capital gains taxed under the India Japan DTAA?

Article 13(3) lets India tax gains from the alienation of shares of a company resident in India. It sets no holding threshold and no rate cap, so Indian domestic law applies in full. Article 13(5) leaves gains from other property, outside paragraphs 1 to 4, to Japan alone. MLI Article 9(4) adds a land rich share test.

| Asset sold by a Japanese company | Treaty article | Who may tax | Indian rate before surcharge and cess (%) |
|---|---|---|---|
| Unlisted shares of an Indian company held more than 24 months | 13(3) | India and Japan | 12.5, section 197 |
| Unlisted shares held 24 months or less | 13(3) | India and Japan | 35 |
| Listed equity shares of an Indian company | 13(3) | India and Japan | Domestic listed share rates on the date of transfer |
| Shares bought back by the Indian company from 1 Apr 2026 | 13(3), on our reading | India and Japan | Capital gain; extra tax for promoters under section 69 |
| Debentures of an Indian company, including compulsorily convertible debentures | 13(5), on our reading | Japan only | Treaty relief from Indian tax |
| Shares of a Japanese company that owns Indian shares | 13(5), on our reading, subject to MLI Article 9(4) | Japan only, unless the land rich test applies | Treaty relief from section 9(10) |
| Shares deriving more than 50 percent of value from Indian immovable property in the prior 365 days | MLI Article 9(4) | India and Japan | Domestic rates |
| Indian immovable property or PE assets | 13(1), 13(2) | India | Domestic rates |

Sources: India Japan DTAA, Article 13; MLI synthesised text; sections 9, 69 and 197 of the Income Tax Act, 2025.

India taxes a Japanese parent's gain on Indian shares whenever the shares were bought, with no grandfathering. From 1 Apr 2026 the Finance Act, 2026 taxes a buy back as a capital gain, not a deemed dividend. Section 69 adds tax for promoters, and a holder above 10 percent of an unlisted company counts as one. So the 10 percent dividend cap no longer helps on a buy back.

Article 13(3) speaks only of shares of an Indian company. On our reading, Article 13(5) covers a gain on compulsorily convertible debentures or on shares of a Japanese holding company. Only Japan may tax it. That protects against section 9(10) on indirect transfers, except where MLI Article 9(4) applies to land rich shares.

A resident buyer withholds under section 393(2), serial 17, on the sum chargeable. A seller claiming treaty relief should apply for a nil or lower deduction certificate in Form 128. Our note on [lower TDS certificates](/insights/lower-tds-certificate-non-residents-form-128) covers it. Rule 128(2), as substituted by Notification No. 55/2026, keeps GAAR away from gains on investments made before 1 Apr 2017.

## How does the MLI change the India Japan treaty?

The MLI applies to the India Japan treaty and both its protocols. It entered into force for Japan on 1 Jan 2019 and for India on 1 Oct 2019. For Indian taxes it has effect for withholding events and taxable periods from 1 Apr 2020. For Japan it has effect for withholding events from 1 Jan 2020.

The Japanese Ministry of Finance page and India's synthesised text list the same provisions:

1. **Preamble and principal purpose test, MLI Articles 6(1) and 7(1).** A benefit is denied where obtaining it was "one of the principal purposes" of an arrangement, unless it fits the object of the treaty.
2. **Dual resident entities, MLI Article 4(1).** The competent authorities decide a company's residence by mutual agreement. Without agreement, the company gets no treaty relief.
3. **Land rich shares, MLI Article 9(4).** India may tax gains on shares that drew more than 50 percent of their value from Indian immovable property in the 365 days before the sale.
4. **Third jurisdiction PEs, MLI Article 10.** No benefit where income goes to a low taxed PE in a third country.
5. **PE rules, MLI Articles 12, 13(2), 13(4) and 15.** The agent rule widens, each exemption must be preparatory or auxiliary, and group activities cannot be split.
6. **Corresponding adjustments, MLI Article 17(1).** It replaces Article 9(2) of the treaty.

MLI Articles 8, 14 and 16 do not appear. So there is no 365 day holding period for dividends and no change to the three year MAP window in Article 25.

CBDT Circular No. 01/2025 of 21 Jan 2025 guides officers on the PPT. It grandfathers only certain Cyprus, Mauritius and Singapore provisions, so every Japanese claim faces the test. A Japanese operating parent with staff and a board in Japan rarely has a PPT problem. A holding company with no staff of its own is the usual target. Our guide to [GAAR in India for foreign companies](/insights/gaar-india-for-foreign-companies) covers Chapter XI.

For a UAE parent, our guide to the [India UAE DTAA for companies](/insights/india-uae-dtaa-for-companies) covers rates, residency and the principal purpose test.

## Which documents does a Japanese company need to claim the treaty rate?

Section 159(8) of the Income Tax Act, 2025 needs two things. One is a certificate of residence from Japan, which the competent Japanese tax office issues. The other is the prescribed information in Form 41, filed online under rule 75. The Indian payer also wants a PAN or the rule 217 details, declarations and a chartered accountant's Form 146.

| Document | Issued or filed by | What it supports | Timing |
|---|---|---|---|
| Certificate of residence (kyojusha shomeisho) | Japanese company's competent tax office, on request by post or in person | Section 159(8)(a); Article 4 | Close to the first payment; refresh during the tax year |
| Form 41 (old Form 10F) | Japanese company, online | Section 159(8)(b); rule 75 | Once per tax year, before the first payment |
| PAN, or the rule 217 details | Japanese company | Avoids the higher rate under section 397(2) | Before tax is deducted |
| Beneficial ownership declaration | Japanese company | Articles 10(2), 11(2) and 12(2) | Each year, and on each dividend date |
| No PE declaration, with a log of staff presence and premises used | Japanese company | Articles 5, 7, 10(4), 11(6) and 12(5) | Each year, updated on any change |
| JBIC, NEXI or other guarantee, insurance or loan papers | Lender or Japanese company | Article 11(3) exemption | Before the first interest payment |
| Technical assistance, licence or service agreement, with cost evidence | Both companies | Article 12; Articles 11(8) and 12(7) | Before the first invoice |
| Form 146 (old 15CB), then Form 145 (old 15CA) | Chartered accountant, then Indian company | Rate and article checked; remittance information | Before the money leaves India |
| Form 131 (old 16A) | Indian company, from TRACES | Credit for Indian tax in Japan | Within 15 days of the Form 144 due date |

The National Tax Agency takes the request at the competent tax office, by post or in person. The applicant uses the partner country's form where one exists, and otherwise the NTA form for treaty countries. India prescribes no form of its own, so Japanese companies normally use the NTA treaty form. Issue can take several days. The NTA may refuse a certificate that states a validity period, confirms there is no PE abroad or shows income or tax amounts. So we ask for a certificate close to the first payment of the tax year and refresh it as needed.

The Form 41 guidance note says the form is filed "only once in a tax year" and PAN is optional. It also says: "Benefit of DTAA is available only with filing of Form 41."

Our guide to [Form 10F and the tax residency certificate](/insights/form-10f-and-tax-residency-certificate-india) covers Form 41 step by step. Rule 217 lists four items that stop the higher rate under section 397(2) where there is no PAN. They are contact details, the foreign address, the residence certificate and the foreign tax identification number.

If the certificate arrives late, deduct at the domestic rate, and the Japanese company claims the excess through its Indian return. The other route is a lower deduction certificate in Form 128 under section 395(1). Our [Form 145 and 146 guide](/insights/form-15ca-and-15cb-requirements-guide-2026) explains which part of Form 145 applies in each case.

## Does a Japanese company have to file an Indian tax return?

Yes, whenever it takes the 10 percent treaty rate. Section 207(8) of the Income Tax Act, 2025 excuses a foreign company from filing only on two conditions. Its Indian income must consist only of section 207 items. Tax must also be deducted at the section 207 rate or more. A 10 percent treaty rate is below 20 percent, so the second condition fails.

So a Japanese parent paid a 10 percent dividend, royalty or fee files an Indian return for that tax year. It needs a PAN, and section 263 sets the due date for companies. The return is also where it recovers tax deducted at the domestic rate before its certificate arrived.

Capital gains and PE profits also need a return. We file the parent's return on the same engagement as the Form 146, so the Form 131 credit matches.

## How does Japan relieve the Indian tax?

Article 23(3)(a) makes Japan allow a credit for Indian tax on income India may tax under the treaty. The credit is capped at the Japanese tax on that income. Article 23(3)(b) adds an indirect credit for dividends. It applies where a Japanese company owns at least 25 percent of the voting shares, or of the total shares, of the Indian company. The 2006 protocol deleted Article 23(3)(c) from 28 Jun 2006, so Japan's credit now follows paragraphs (a) and (b) only.

How Japanese domestic law treats a dividend from an Indian subsidiary is a Japanese law question. Ask the Japanese adviser before choosing between a dividend, a royalty and a fee.

Disputes go to the mutual agreement procedure in Article 25, within three years of the first notification of the action. MLI Article 17(1) supplies the corresponding adjustment, which supports a bilateral advance pricing agreement. The Indian forms are now Form 55 for MAP and Form 51 for an APA.

## What changed in 2026

The treaty text did not change in 2026. The Indian law around it did change. A new Act took effect on 1 Apr 2026, with new rules, a GAAR rule change and a new buy back rule. Board papers, Forms 146 and bank letters should now cite sections 159 and 393, not sections 90 and 195.

| Item | Until 31 Mar 2026 | From 1 Apr 2026 or later | Instrument |
|---|---|---|---|
| Treaty relief and the more beneficial rule | Section 90(1) and 90(2) | Section 159(1) and 159(4) | Income Tax Act, 2025 |
| GAAR override of treaties | Section 90(2A) | Section 159(6) | Income Tax Act, 2025 |
| Residence certificate and other documents | Section 90(4) and 90(5) | Section 159(8)(a) and 159(8)(b) | Income Tax Act, 2025 |
| Treaty information form | Form 10F, rule 21AB | Form 41, rule 75 | Income Tax Rules, 2026 |
| Withholding on payments to non residents | Section 195 | Section 393(2), Table serial 17 | Income Tax Act, 2025 |
| Rates on dividends, interest, royalties and technical fees | Section 115A | Section 207 | Income Tax Act, 2025 |
| Return filing exemption | Section 115A(5) | Section 207(8) | Income Tax Act, 2025 |
| Royalty and technical fees at home | Section 9(1)(vi) and 9(1)(vii) | Section 9(6) and 9(7) | Income Tax Act, 2025 |
| Remittance, statement and certificate forms | Forms 15CA, 15CB, 27Q and 16A | Forms 145, 146, 144 and 131 | Income Tax Rules, 2026 |
| GAAR carve out for investments made before 1 Apr 2017 | Rule 10U(1)(d) | Rule 128(2) as substituted | Notification No. 55/2026, 31 Mar 2026 |
| Buy back by an Indian company | Deemed dividend from 1 Oct 2024, so Article 10 | Capital gain, so Article 13(3) on our reading | Finance Act, 2026 |
| Due dates for AY 2026-27, non transfer pricing cases | Tax audit 30 Sep 2026; return 31 Oct 2026 | Tax audit 21 Oct 2026; return 21 Nov 2026 | CBDT Circular No. 07/2026 |

Transfer pricing cases kept 31 Oct 2026 for the tax audit report and Form 3CEB, and 30 Nov 2026 for the return. The other changes are mapped in [our note on the Income Tax Act, 2025](/insights/income-tax-act-2025-changes-for-foreign-owned-companies).

## What happens if the Indian company applies the wrong rate?

Deducting 10 percent without the documents makes the Indian company an assessee in default under section 398(1) (old section 201). It owes the shortfall, interest at 1 percent a month for late deduction and possibly a penalty up to the tax under section 448. Section 35(b)(ii) can also disallow the expense. A missing or wrong Form 145 or Form 146 carries INR 1,00,000 under section 462.

## Worked example

### A Japanese parent paid a royalty, a fee, interest and a dividend

NipponCo KK is resident in Japan and owns 100 percent of IndiaCo Private Limited, a maker of car components. A nominee holds one share for NipponCo. In tax year 2026-27 IndiaCo pays NipponCo four amounts:

1. **A technical know how royalty of INR 2,40,00,000**, at an agreed percentage of sales.
2. **An engineering support fee of INR 80,00,000** for design reviews and quality audits run from Japan.
3. **Interest of INR 60,00,000** on a US dollar ECB from NipponCo, priced at arm's length.
4. **An interim dividend of INR 4,00,00,000**, declared by the Board on 10 Nov 2026.

NipponCo filed Form 41 for tax year 2026-27 in May 2026. It holds a certificate of residence covering every payment date. It has a PAN and has given beneficial ownership and no PE declarations. Its engineers visit India but have no office at their disposal there.

Each payment bears 10 percent under the treaty. The royalty and the fee fall under Article 12(2), the interest under Article 11(2) and the dividend under Article 10(2). Without the treaty papers, each bears 20 percent under section 207. The year's total to NipponCo is INR 7,80,00,000, in the 2 percent surcharge slab. The domestic effective rate is therefore 21.216 percent.

| Payment (INR) | Treaty route, 10% (INR) | Domestic route, 21.216% (INR) |
|---|---|---|
| Royalty, 2,40,00,000 | 24,00,000 | 50,91,840 |
| Engineering support fee, 80,00,000 | 8,00,000 | 16,97,280 |
| Interest on the ECB, 60,00,000 | 6,00,000 | 12,72,960 |
| Dividend, 4,00,00,000 | 40,00,000 | 84,86,400 |
| Total tax withheld | 78,00,000 | 1,65,48,480 |
| Net amount remitted from 7,80,00,000 | 7,02,00,000 | 6,14,51,520 |

The domestic dividend line builds up in three steps. Tax at 20 percent of INR 4,00,00,000 is INR 80,00,000. Surcharge at 2 percent adds INR 1,60,000. Cess at 4 percent on INR 81,60,000 adds INR 3,26,400, for INR 84,86,400.

On the treaty route IndiaCo withholds INR 78,00,000. NipponCo receives INR 87,48,480 more than on the domestic route.

IndiaCo also borrows from JBIC and pays it interest of INR 30,00,000 in the year. Article 11(3)(a) makes that interest taxable only in Japan. IndiaCo files Form 145 with Form 146 citing Article 11(3), and deducts no Indian tax.

IndiaCo deposits the dividend tax by 7 Dec 2026 under rule 218(2) and pays NipponCo after Forms 146 and 145. It files Form 144 for October to December 2026 by 31 Jan 2027 under rule 219, and issues Form 131 by 15 Feb 2027. It reports the royalty, fee and interest in Form 48 under section 172. Our guide to [dividends from an Indian subsidiary](/insights/dividend-from-indian-subsidiary-to-foreign-parent) covers the company law steps.

### The same engineers supervise a plant installation

Now suppose NipponCo's engineers supervise the installation of a new press line at IndiaCo's plant. They supervise from 1 Jul 2026 to 15 Feb 2027, which is more than six months. Article 5(4) makes the supervision a PE of NipponCo in India.

NipponCo's supervision fee is then connected with the PE. Article 12(5) takes it out of the 10 percent cap. India taxes the profit attributable to the PE at 35 percent, plus surcharge and cess, through a return. Understanding 8 bars a deduction for the royalties and management charges the PE pays NipponCo's head office.

Had the supervision ended within six months, there would be no PE under Article 5(4). The fee would bear 10 percent under Article 12.

### A later sale of shares

In 2027 NipponCo sells a 26 percent stake in IndiaCo, held since 2015, to an Indian buyer. The long term gain is INR 3,00,00,000. Article 13(3) leaves the gain to Indian law, with no relief for older shares.

Tax at 12.5 percent under section 197 is INR 37,50,000. Surcharge at 2 percent adds INR 75,000. Cess at 4 percent on INR 38,25,000 adds INR 1,53,000. The Indian tax is INR 39,78,000, which the buyer withholds under section 393(2), serial 17. The 2 percent slab is our assumption; the buyer applies the slab for the actual payment.

## Common mistakes

1. **Applying the UK or US make available test to a Japanese fee.** Fix: Article 12(4) includes managerial services, so deduct 10 percent on management and support fees.
2. **Deducting 20 percent plus surcharge on interest to JBIC or on NEXI insured debt.** Fix: test Article 11(3) and keep the lender or insurance papers on file.
3. **Adding surcharge and cess to the treaty rate.** Fix: apply 10 percent flat and cite the article in Form 146.
4. **Counting service PE days for Japanese visitors.** Fix: the treaty has no service PE; test fixed places, projects, supervision over six months and agents.
5. **Ignoring the commissionnaire rule.** Fix: review Indian sales staff who negotiate contracts the Japanese parent signs. MLI Article 12 applies from 1 Apr 2020.
6. **Assuming old shares are exempt from Indian capital gains tax.** Fix: apply Article 13(3); there is no grandfathering.
7. **Telling the parent the treaty rate ends its Indian filings.** Fix: plan a PAN and an Indian return under section 207(8).
8. **Citing sections 90 and 195 in a 2026 Form 146.** Fix: cite sections 159, 207 and 393(2), serial 17.

## Checklist

1. Confirm the Japanese company holds a certificate of residence covering each payment date.
2. File Form 41 once for the tax year before the first payment.
3. Obtain a PAN, or collect the four rule 217 items.
4. Classify each payment as dividend, interest, royalty, technical fee, business profit or capital gain.
5. Apply 10 percent to dividends, interest, royalties and managerial, technical or consultancy fees.
6. Check whether interest is exempt under Article 11(3) because of JBIC, NEXI, JICA or another listed body.
7. Review Japanese staff presence for a fixed place, projects or supervision over six months, and agents.
8. Review Indian sales staff against the commissionnaire rule in MLI Article 12.
9. Collect beneficial ownership and no PE declarations, and keep the substance file for the PPT.
10. Deduct tax at the earlier of credit and payment, at the flat treaty rate.
11. Obtain Form 146 and file Form 145 before each remittance.
12. Deposit the tax by the 7th of the next month, file Form 144 and issue Form 131.
13. Remind the Japanese company to file its Indian return.

To have us review a Japanese payment, a project or a share sale before it happens, send the agreement and the shareholding through our [contact page](/contact).

## Key terms

- **Double Taxation Avoidance Agreement (DTAA)**: A treaty between India and another country that divides taxing rights over cross border income and caps Indian withholding tax. Section 159 of the Income Tax Act, 2025 (old section 90) gives treaties effect. Where India has no comprehensive DTAA with a country, domestic withholding rates under the Income Tax Act, 2025 apply and no treaty documents are needed. (https://krystal7.com/glossary#double-taxation-avoidance-agreement)
- **Form 41 (old Form 10F)**: Form 41 is the online statement a non resident files on the income tax portal to claim treaty benefits under section 159(8) of the Income Tax Act, 2025. It replaced Form 10F from 1 Apr 2026. Rule 75 of the Income Tax Rules, 2026 requires it once per tax year, and payers ask for it before the first payment. (https://krystal7.com/glossary#form-41-old-form-10f)
- **Tax Residency Certificate (TRC)**: A TRC is the certificate a payee's home tax authority issues to confirm its tax residence there for a period. Section 159(8)(a) of the Income Tax Act, 2025 makes it a condition for treaty relief in India, alongside Form 41. An Indian resident applies for one in Form 42 and receives it in Form 43. (https://krystal7.com/glossary#tax-residency-certificate)
- **Fees for Technical Services (FTS)**: Fees for technical services are payments for managerial, technical or consultancy services, such as group management, IT support and engineering fees. Section 9 of the Income Tax Act, 2025 treats them as income arising in India, and section 207 taxes a foreign company at 20 percent before surcharge and cess, unless a tax treaty caps or narrows the charge. (https://krystal7.com/glossary#fees-for-technical-services)
- **Permanent Establishment (PE)**: A permanent establishment is a fixed place of business, a long running project or a dependent agent through which a foreign company carries on business in India, as defined in Article 5 of each Indian tax treaty. India taxes the business profits attributable to a PE through a return, at 35 percent plus surcharge and cess for a foreign company. (https://krystal7.com/glossary#permanent-establishment)
- **Principal Purpose Test (PPT)**: The PPT is the anti abuse rule that the OECD Multilateral Instrument adds to covered Indian tax treaties. It denies a treaty benefit where obtaining it was one of the principal purposes of an arrangement, unless granting it matches the object and purpose of the treaty. CBDT Circular No. 01/2025 of 21 Jan 2025 guides officers on applying it. (https://krystal7.com/glossary#principal-purpose-test)
- **Japan Bank for International Cooperation (JBIC)**: Japan's government owned policy finance bank. Article 11(4) of the India Japan DTAA lists it as a financial institution wholly owned by the Government of Japan, so interest it earns from India is exempt from Indian tax under Article 11(3). (https://krystal7.com/glossary#japan-bank-for-international-cooperation)

## Frequently Asked Questions

### What is the dividend rate under the India Japan DTAA?

It is 10 percent of the gross dividend. Article 10(2), as substituted by the 2006 protocol, caps Indian tax at 10 percent where the Japanese resident is the beneficial owner. The treaty sets one rate for every size of holding. The Indian company needs the Japanese certificate of residence and Form 41 under section 159(8) of the Income Tax Act, 2025.

### What is the TDS rate on royalty paid to a Japanese company?

It is 10 percent under Article 12(2). Article 12(3) covers copyrights, patents, trade marks, designs, secret formulas, know how and the use of industrial, commercial or scientific equipment. Domestic law charges 20 percent under section 207(2), plus surcharge and cess. So the treaty halves the rate once the documents are on file.

### Are management fees paid to a Japanese parent taxed in India?

Yes, at 10 percent. Article 12(4) defines fees for technical services to include services "of a managerial, technical or consultancy nature". There is no make available test, so a regional management fee falls inside Article 12. The Indian company deducts 10 percent under section 393(2), serial 17, and keeps evidence of the services for Form 48.

### Is interest paid to JBIC taxable in India?

No. Article 11(3)(a) makes interest derived and beneficially owned by a financial institution wholly owned by the Government of Japan taxable only in Japan. Article 11(4) names JBIC, JICA, NEXI and the Bank of Japan. Interest on debt they guarantee, insure or indirectly finance is also exempt under Article 11(3)(b).

### Does the India Japan treaty have a service PE clause?

No. Article 5 covers fixed places, construction and installation projects over six months, supervision over six months, mineral oil work and agents. No paragraph creates a PE from staff days alone. Japanese staff can still create a PE through an Indian office or site at their disposal. Supervising a project for more than six months also creates one.

### Is the Indian subsidiary a PE of its Japanese parent?

Not by control alone. Article 5(9) says a subsidiary does not of itself constitute a PE of its parent. The subsidiary can still be a dependent agent PE under Article 5(7), as widened by MLI Article 12. That happens if it habitually concludes contracts, or plays the principal role leading to contracts the parent routinely signs.

### Does India tax a Japanese company's gain on Indian shares?

Yes. Article 13(3) lets India tax gains on shares of an Indian company under its own law, with no holding threshold. A long term gain on unlisted shares bears 12.5 percent under section 197 of the Income Tax Act, 2025, plus surcharge and cess. There is no grandfathering for older shares.

### Does the principal purpose test apply to the India Japan treaty?

Yes. India and Japan both listed the treaty under the MLI, and MLI Article 7(1) applies. In India it has effect for withholding events and taxable periods from 1 Apr 2020. CBDT Circular No. 01/2025 guides officers on applying it. Beneficial ownership and GAAR under section 159(6) also apply.

### How does a Japanese company get a certificate of residence for India?

It asks the competent Japanese tax office, by post or in person, under National Tax Agency guidance. Where the partner country prescribes a form, the company uses it; otherwise it uses the NTA form for treaty countries. India prescribes no format. The NTA does not certify a validity period. So ask for the certificate close to the first Indian payment and refresh it during the tax year.

### What happens if the Japanese certificate arrives after the payment?

The Indian company deducts at the domestic rate under section 207, plus surcharge and cess. Section 159(8) makes the certificate a condition of treaty relief. The Japanese company then files an Indian return with the certificate and Form 41 and claims the excess as a refund. A Form 128 certificate under section 395(1) is the other route.

### Does a Japanese parent need to file an Indian income tax return?

Yes, when it takes the 10 percent treaty rate. Section 207(8) excuses a foreign company only where tax was deducted at the section 207 rate or more. A 10 percent treaty rate is below the 20 percent domestic rate. So the parent needs a PAN and files a return by the section 263 due date.

### Is the salary of a Japanese secondee taxed in India?

Usually yes. Article 15(2) keeps salary taxable only in Japan when the employee stays no more than 183 days in the taxable year or previous year. The employer must also be non resident, and no Indian PE may bear the cost. A secondee working for the Indian company usually fails the employer test.

## Sources

- Income Tax Department, India Japan DTAA with notes and amending notifications (GSR 101(E), 1 Mar 1990; S.O. 1136(E), 19 Jul 2006; S.O. 3346(E), 28 Oct 2016), read 23 Oct 2026, https://www.incometaxindia.gov.in/w/japan-comprehensive-agreements-1
- Income Tax Department, Notification No. 186/2006 (S.O. 1136(E)), Protocol amending the India Japan convention, 19 Jul 2006, https://www.incometaxindia.gov.in/w/186-notification-186-date-of-issue-19/7/2006
- Income Tax Department, Synthesised text of the MLI and the India Japan convention, https://incometaxindia.gov.in/DTAA/MLI-synthesized-text-final-India-Japan-For-publishing.htm
- Ministry of Finance, Japan, MLI and the Japan India tax convention, https://www.mof.go.jp/english/tax_policy/tax_conventions/mli_in.htm
- Ministry of Finance, Japan, Signing of the protocol amending the Japan India tax convention, 11 Dec 2015, https://www.mof.go.jp/english/tax_policy/tax_conventions/press_release/20151211in.htm
- National Tax Agency, Japan, Request for a certificate of residence (Tax Answer 9210), read 23 Oct 2026, https://www.nta.go.jp/taxes/shiraberu/taxanswer/osirase/9210.htm
- Income Tax Department, Income Tax Act, 2025 as amended by the Finance Act, 2026, https://www.incometaxindia.gov.in/documents/d/guest/income_tax_act_2025_as_amended_by_fa_act_2026-pdf
- Income Tax Department, Section 159 of the Income Tax Act, 2025 (double taxation relief), https://www.incometaxindia.gov.in/w/section-159-89
- Income Tax Department, Section 207 of the Income Tax Act, 2025 (sub sections (1), (2) and (8)), read 23 Oct 2026, https://www.incometaxindia.gov.in/w/section-207-78
- Income Tax Department, Section 9 of the Income Tax Act, 2025 (income deemed to accrue or arise in India), https://www.incometaxindia.gov.in/w/section-9-1
- Income Tax Department, Section 6 of the Income Tax Act, 2025 (residence), https://www.incometaxindia.gov.in/w/section-6-1
- Income Tax Department, Section 197 of the Income Tax Act, 2025 (long term capital gains), https://www.incometaxindia.gov.in/w/section-197-78
- Income Tax Department, Section 393 of the Income Tax Act, 2025 (tax deducted at source), https://www.incometaxindia.gov.in/w/section-393-6
- Income Tax Department, Section 397 of the Income Tax Act, 2025 (PAN and information on payments to non residents), https://www.incometaxindia.gov.in/w/section-397-6
- Income Tax Department, Sections 398, 427, 448 and 462 of the Income Tax Act, 2025, https://www.incometaxindia.gov.in/w/section-398-6, https://www.incometaxindia.gov.in/w/section-427-6, https://www.incometaxindia.gov.in/w/section-448-6, https://www.incometaxindia.gov.in/w/section-462-6
- Income Tax Department, Rules 215, 217, 218, 219 and 220 of the Income Tax Rules, 2026, https://www.incometaxindia.gov.in/w/rule-215-1, https://www.incometaxindia.gov.in/w/rule-217-1, https://www.incometaxindia.gov.in/w/rule-218-1, https://www.incometaxindia.gov.in/w/rule-219-1, https://www.incometaxindia.gov.in/w/rule-220-1
- Income Tax Department, First Schedule to the Finance Act, 2026 (Part II rates), https://www.incometaxindia.gov.in/w/first-schedule-104
- Income Tax Department, Guidance note on Form 41, https://www.incometaxindia.gov.in/documents/d/guest/fn-41
- Income Tax Department, FAQs and Guidance Notes on Forms as per Income Tax Rules, 2026 (form map), https://www.incometaxindia.gov.in/faqs-and-guidance-notes-on-forms-as-per-income-tax-rules-2026
- Central Board of Direct Taxes, Circular No. 01/2025, Guidance for application of the Principal Purpose Test under India's DTAAs, 21 Jan 2025, https://www.incometaxindia.gov.in/documents/d/guest/circular-1-2025-pdf
- Central Board of Direct Taxes, Notification No. 55/2026, Income Tax (Amendment) Rules, 2026 (rule 128), 31 Mar 2026, https://www.incometaxindia.gov.in/documents/d/guest/notification-no-55-2026-1-pdf
- Supreme Court of India, Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, 2 Mar 2021, https://api.sci.gov.in/supremecourt/2011/38137/38137_2011_33_1501_26629_Order_02-Mar-2021.pdf

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